Robeco’s star search in Asia

18-05-2016 | Insight

In his skeptical, contrarian and patient manner, Robeco Asian Stars fund manager Michiel van Voorst searches for companies that are wrongly undervalued. Join us on a contrarian investment journey through Asia. “China sometimes takes two steps forward and one step back, but the economy is reforming.”

Michiel

van Voorst

Fund Manager Equities

Speed read

Deviating with a high active share and concentrated portfolio brings rewards

Short-term focus of investors leads to strong overvaluations and undervaluations in Asia

Valuations in Asia remain cheap, both in absolute terms and versus global markets

“Be skeptical, trade little and be patient.” Nothing, according to manager Michiel van Voorst, sums up the Robeco Asian Stars investment philosophy better than this motto of Daniel Kahneman. The psychologist linked the human psyche to economic science and became the father of behavioral finance. That is the science that studies how people take financial decisions, with human judgment capacity and decision-making – in uncertain circumstances – playing a key role. This has demonstrated that overconfidence, aversion to loss and the fear of straying from the herd play a role, consciously or unconsciously, in investment decisions.

But deviating from the norm is exactly what Van Voorst does with Robeco Asian Stars. Away from the benchmark and market consensus. Investing in an unfettered and contrarian way based on strong convictions – that’s the motto. “As an investment fund, we aim to distinguish ourselves from the index. So we actually have to deviate from the MSCI Asia ex-Japan through a higher active share. This deviation is between 80 and 90 percent. A deviation using a concentrated portfolio with 40 to 50 stocks versus the 600 stocks included in the index,” the fund manager explains.

“Investors in Asia are very focused on the short term, which leads to the strong overvaluation or undervaluation of stocks. We on the other hand apply a long-term view. Our investment horizon is three to five years, and we have the patience to allow a stock to increase in value. We don’t trade often, as then we would be in danger of being driven by sentiment. Academic studies show that investors overestimate growth. And that’s why we are skeptical when the market has high expectations of a country, sector or company. That’s when we avoid the market.”

The ‘stars’ that Van Voorst invests in are companies that “are undervalued, for whatever reason,” and for which there are catalysts that will eventually eliminate this undervaluation. These are quality names with a sound business model and a stable cash flow with growth potential, but which the market is currently incorrectly pricing in. Something is not entirely kosher in the business, but there are factors for change that unlock the undervaluation and give the company a more favorable future. Examples of such factors include new management, reorganization, cost-reduction programs and a pipeline of new products.

‘Emerging’ or ‘developed’ doesn’t say anything

The countries in which Robeco Asian Stars invests are diverse and form a mix of emerging, (nearly) developed and frontier markets. However, based on his contrarian investment philosophy, Van Voorst doesn’t have much truck with definitions like ‘emerging’ or ‘developed’ markets. He thinks it’s an artificial distinction. "We look at the Asian region excluding Japan and Australia. This region offers a broad spectrum through which we can invest in young, fast-growing economies such as India, Indonesia, the Philippines, Malaysia and Pakistan, as well as economies like Taiwan and South Korea which are close to being defined as developed. As long as expectations for a country are not overestimated and the risk-return ratio is healthy, it will be considered by the fund.”

Sector divisions are also often not what they are cracked up to be, according to Van Voorst. “We invest in Beijing Capital International Airport, which is classified as ‘industry‘, but we see it more as an investment in a clear consumption trend. Tourism is growing very rapidly in China, and demand for visiting foreign destinations is gradually on the increase. Airports are benefiting from burgeoning passenger numbers, but also from the wide array of duty-free stores they operate. With CK Hutchison Holdings, we invest in a conglomerate with the label of ‘industry’, but it also has interests in telecom, infrastructure, retail and energy. We don‘t steer the fund towards sectors, but we naturally look at whether a sector is attractively valued.”

‘The Chinese economy is changing slowly but surely – with the occasional two steps forward, one step back.’

Higher dividends and share buybacks in South Korea

Currently, Van Voorst has a preference for Northern Asian countries above those in South-East Asia. For this last region, he thinks expectations are too high. “We see little growth, while significant earnings growth is factored into share prices. Which is why we are focusing on China, Taiwan, India and Pakistan, and less on Indonesia, Malaysia and Thailand.”

Chinese companies represent a third of the portfolio, so this country has a significant weight. Van Voorst believes that the Chinese economy is currently undergoing a re-balancing process and won‘t collapse. “There are of course structural problems in China, such as industrial overcapacity and the debt mountain. But the Chinese government recognizes these problems and is dealing with them, only they‘re doing this the Chinese way. Which means slowly but surely, with the occasional two steps forward, one step back. The Chinese economy is reforming, the importance of industry is in decline and domestic consumption is increasing. In the meantime, the economy is growing – although less vigorously than in the past. However, Chinese share prices are pricing in a hard landing and that means opportunities for patient investors.”

Van Voorst sees South Korea as a great place for patient investors. “We expect South Korean companies to go for higher dividends and share buybacks due to the low economic growth. We‘ve seen this tendency before in the US and in Japan, when companies were struggling with the same economic conditions. It is also a good example of how GDP growth doesn’t necessarily say anything about earnings growth. So you really can generate profits with higher dividends and share buybacks in an environment of low economic growth. It might take some time, but we can wait.”

Trend reversal from risk-off to risk-on

As a “simple value investor”, the investment climate of the past year was difficult for Van Voorst. Low interest rates meant investors searching for returns were attracted to fast-growing companies with a high dividend in Asia too. “These companies have never been so expensive,” says the fund manager, who doesn’t want to participate in this trend. On the other hand, more cyclical companies were trading at lower valuations, offering some opportunities. Robeco Asian Stars is therefore also invested in Samsung. “This is a top-notch company that generates a considerable free cash flow, but with a valuation that is as low as during the financial crisis.”

What the near future holds is uncertain. In March, Van Voorst saw a sharp trend reversal and a general shift among investors from risk-off to risk-on behavior. “Asian markets are now lower than after the first Chinese panic in August. As long as the Chinese economy is not recovering, we think that upside potential is limited. However, evidence of this is still sparse. But valuations in Asia are cheap, both in an absolute sense and relative to markets worldwide.”

In the year to 31 March, Robeco Asian Stars booked a loss of -3.73%1 (versus -2.98% for MSCI Asian ex-Japan NR). Yet due to the fund’s long-term view, it is better to look at returns over longer periods. Over the last three years, the fund (4.47%) has slightly outperformed the index (4.18%). Since its launch in March 2011, Robeco Asian Stars has generated a return of 6.87%, comfortably outperforming the benchmark, which posted 4.46%. So the fund can celebrate its fifth birthday with pride.

1 Returns for fund class D EUR, net return based on net asset value (NAV) net of fees, annualized for periods longer than a year. The return of investments can fluctuate. Past performance is no guarantee of future results.

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